RBC exits wealth management in Cayman Islands, Caribbean

RBC Wealth Management has announced plans to discontinue its private wealth management business in the Caribbean. The strategy to “realign certain businesses within [its] international operations” was presented to staff in an internal memorandum last Thursday.

It is not clear whether the business will be closed or sold.

Paul French, a spokesperson for RBC Wealth Management, confirmed the plans but said the changes are not going to impact Royal Bank of Canada’s retail operations in the Cayman Islands.

“We will be exiting all RBC Wealth Management Caribbean operations, with the exception of our Investment Advisory Operations (DS Global) team, which has a team based in Cayman,” he said. “We will consider all strategic options for our Caribbean international wealth management businesses, including, where applicable, identifying interested parties to purchase operations or refer our clients.”

RBC has regional wealth management offices in Cayman, Barbados and the Bahamas. The move will also affect certain international advisory groups based in Canada and the U.S. In addition, RBC has started a “strategic review” of its Swiss business.

RBC said it would be premature to estimate the timing of any next steps and the number of employees that will be impacted because the bank is considering a number of options for its wealth management businesses.

RBC said it is implementing a strategy that will enable it “to achieve sustainable, controlled growth and profitable scale in our priority markets.”

“Our long-term vision is a scalable and more focused wealth management business serving high-net-worth and ultra-high-net-worth clients from our key operational hubs in Canada, the U.S., the British Isles and Asia,” the bank said. “Those areas have been selected because they offer the best opportunities and allow the bank ‘to build on the strengths of RBC’s other businesses.”

Private wealth management in the Caribbean is becoming less profitable amid increasing regulation. The Foreign Account Tax Compliance Act, which forces financial institutions worldwide to report U.S. customer assets to the U.S. Internal Revenue Service, and more extensive anti-money laundering controls, for example, impose additional costs on banks.

“As with many other financial institutions, we face increasing costs associated with the controls we need to have in place for cross-border business,” Mr. French said. “In businesses and products for which we do not have sufficient scale, it is difficult to justify the expense necessary to maintain a high level of client service and ensure a strong foundation to serve our clients well for generations to come. Accordingly, we have made the difficult decision to exit these businesses.”

Only two years ago, RBC Wealth Management bought the private banking business of Coutts in Latin America, the Caribbean, including Cayman, and Africa, with client assets worth more than US$2 billion.

Canadian retail banks

On the retail banking side, RBC – Canada’s largest bank – sold its Jamaican banking operations at a loss to Sagicor Group Jamaica earlier this year. At the time, RBC said it remained committed to the Caribbean but would focus on regions where it has a significant market share.

Mr. French said this is still the case. “Cayman and the Caribbean continue to be an important part of Royal Bank of Canada’s overall strategy in the retail, personal and commercial banking space and we will consider how best to leverage our capabilities across our Caribbean business going forward.”

Other Canadian banks are considering their options in retail banking.

Earlier this month, Scotiabank said its international banking arm would close 120 of its foreign branches, including in the Caribbean region. Worldwide Scotiabank plans to cut 1,500 jobs with about one third coming from outside Canada.

Meanwhile, in May, Canadian Imperial Bank of Commerce recorded a non-cash goodwill impairment charge of C$420 million on its investment in CIBC FirstCaribbean International Bank, blaming “persistently challenging economic conditions” and the negative outlook in many Caribbean countries. CIBC also recorded C$123 million of incremental loan losses for CIBC FirstCaribbean based on revised expectations on the extent and timing of the economic recovery in the Caribbean region.

While the economic climate in the Caribbean remains challenging, favorable business conditions in Canada are threatening to deteriorate. Canadian consumers are highly leveraged and demand for personal loans and mortgages is expected to slow considerably, and Canadian banks have to prepare for potential interest rate hikes in 2015. As a result, banks’ strategies have to focus on new growth areas and capital has to be deployed in different business segments.

Market shake-up

Cayman’s banking market has seen a significant shake-up recently with the sale of parts of HSBC’s corporate and retail banking operations to Butterfield and the sale of Coutts’ private banking business to RBC.

Rather than a decision for or against certain jurisdictions, high level strategic decisions to leave business segments can also be seen in the context of a favorable economic environment for mergers and acquisitions, according to Simon Raftopoulos, partner at law and fiduciary firm Appleby.

“Vendors such as Coutts and HSBC, attracted by resilient valuations, have been seeking to dispose of assets in order to free up their balance sheets in light of the strict regulatory capital requirements imposed under Basel III,” he wrote in the current issue of the Cayman Financial Review. “Meanwhile, purchasers, benefiting from continuing low interest rates, have sought acquisitions to either grow or consolidate their offshore market share.”

The departure of Coutts and HSBC originated from so-called big picture internal strategic reviews in the context of a favorable economic climate for deal making, Mr. Raftopoulos said.

As RBC, Coutts and HSBC are exiting the wealth management or banking market in Cayman, others are looking to step in and expand. “We are seeking to become a dominant player in the Caribbean,” said Kobi Dorenbush, CEO of Caledonian, explaining that his firm aims to grow both organically and through acquisitions. “The recent RBC announcement presents an opportunity for us and other market participants to try to fill in the gaps created by this market disruption.”

Even the regulatory burden created by FATCA can present opportunities for some market participants, he argued. “At Caledonian, we continue to work with U.S. clients and have successfully built a FATCA compliance program to help us manage our obligations. We are finding that many clients with a U.S. nexus have turned to us for service after they’ve been turned away by their existing service providers who have exited their market,” Mr. Dorenbush said.